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In 1944, the famous political economist Karl Polanyi explained the root cause of WW II
when he wrote in The Great Transformation, “The true nature of the international
(economic) system under which we were living was not realized until it failed.” Similarly,
mainstream economists and finance theorists still do not get the vital interconnection
between the true nature of the (economic) system under which we are living, and healthy
ecosystem function. What will it take?

One complex, indivisible, systemic crisis: Good morning, America!

Let us be optimistic. Let us assume we begin, for real, to do all the things we know
we need to do, we know how to do, we have the technology to do, but until now we have
lacked the will to do. The list includes a carbon tax—think $10 gasoline America,
going to $20; feed-in tariffs; energy efficiency incentives; sustainable agriculture; and
massive public investment in renewable energy research. But the true nature of the system
under which we live will demand far more.

Systems scientists know that Sandy and the historic drought that preceded it are mere
symptoms of a systems design failure. That is, an economic system design failure, a
system designed for a set of circumstances that applied in the past—huge planet,
small economy, abundant resources, unlimited waste sinks—but are no longer relevant.
The context has shifted.

This time really is different.

Awakening to this system design problem will be an existential crisis for capitalism.
It will push us beyond, “doing what we know we need to do.” In particular, it will shake
the foundations of finance.

Indeed, a community of practitioners and thinkers are already busy at work
comprehending and living the next Great Transformation. It is grounded in the ethics of
Nobel laureate Albert Schweitzer’s, “Reverence for Life.” It understands that humanity is
a part of, not separate from, nature.

Here are five critical challenges we must face in the Great Transformation of the
twenty-first century, above and beyond “doing what we know we need to do:”

Establish limits and track vital metrics

1. Following the model provided by the Intergovernmental Panel on Climate Change, we
will need similar monumental efforts establishing limits and then tracking vital metrics
for issues including biodiversity loss, the water cycle, the nitrogen cycle, chemical
pollutants, and other critical ecosystem boundaries, what Johan Rockstrom calls “the safe
operating space” for humanity. Such data must be integrated into a coherent whole by a
trusted institution which might be called the Global Ecosystem Reserve, as first described
by Peter Brown in
Right Relationship.

Regenerate natural carbon sinks

2. We will need a war-like effort mobilized to regenerate the world’s natural carbon
sinks—the oceans, grasslands, forests, and peat bogs—whose health or continued
decay literally hold the future of humanity in the balance. As one example, the holistic
management of the world’s vast grasslands (the second largest carbon sink after the
oceans), pioneered by Buckminster Fuller prize
winner Allan Savory, must be scaled up to regenerate the world’s 5 billion hectares of
grasslands from gradual, carbon-releasing desertification and its catastrophic human
consequences that include famine and war.

Learn from nature

3. We will need to reimagine products and services, business models, supply chains,
indeed entire local and regional economies, and the global economic system, using nature’s
holistic design principles that we know lead to resiliency. Biologist Janine Benyus,
author of Biomimicry has developed a set of design lessons from nature she calls “Life’s
Principles.” These Principles represent nature’s proven strategies for sustainability that
will guide us.

Economy of sufficiency

4. We will need an economy of sufficiency that does not demand exponential growth of
material throughput from finite resources on a planet that is fixed in scale. This
inevitably leads us well past what economists call “pricing externalities” so that our
prices tell the ecologic truth. The priceless cannot be priced. The context within which
the human economy must operate includes limits and boundaries, just as the context for the
painter includes the boundaries of her canvas. Our emerging recognition of boundaries has
already begun to stimulate a creative response like never before in the history of
humanity.

Re-examination of the finance sector

5. Finance in particular is in for a period of fundamental re-examination that will
reveal its confusion of means and ends. Exponential expansion of financial capital is not
a greed problem, although greed is a problem. On a finite planet under stress, the goal
of compounding financial returns on a now massive stock of financial capital is a design
principle that is deeply flawed. Comprehending the implications of this physical truth
demands the focus of finance academics, rather than ever-greater immersion in financial
abstraction.

After over two centuries of childhood and adolescence, capitalism in the developed
world must now mature. Such maturity will entail connecting the dots between the need to
bend the exponential curves of physical growth—from carbon emissions, to resource
use, to population itself—all the way to the exponential abstract growth derived
from compound interest itself.

When Einstein said that compound interest is the most powerful force in the universe,
he was apparently both joking and serious. How prescient.

We will see that the entropy law, the second law (not theory) of thermodynamics, must
and will assert its proper place as supreme ruler over the false abstraction of compound
financial returns on an ever expanding stock of financial capital in the face of a
diminishing stock of natural capital.

A generation ago, we failed to comprehend the system under which we were living until
it failed, ushering in WW II. Let us have the insight and courage to apprehend the true
nature of our deeply flawed, present-day system, and the transformation it demands, before
it too fails.

—John Fullerton

John Fullerton is the founder and
president of the Capital Institute. He is
also the principal of Level 3 Capital Advisors, LLC, an investment firm focused on high
impact sustainable private investments. This article originally appeared on his blog, The Future of
Finance.

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